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The Assumption That Gets Startups in Trouble
One of the most common and most dangerous assumptions in the startup world: "We paid a contractor to build it, so we own it."
Under US copyright law, that assumption is almost certainly wrong when it comes to software.
The legal doctrine that governs who owns work product is called "work made for hire." Most founders have heard the phrase. Very few understand what it actually means, and the gap between what people think it means and what it actually means has caused IP ownership disputes that cost companies millions.
How Copyright Ownership Actually Works
Under US copyright law (17 U.S.C. Section 201), copyright in a work vests initially in the author. The person who creates the work owns it by default.
The "work made for hire" doctrine is an exception. It says the employer, not the employee, is the legal author when certain conditions are met. But those conditions are narrower than most people realize.
Part 1: Employee Works
If a work is created by an employee within the scope of employment, it's a work made for hire. The employer owns it automatically. No special agreement is needed.
The Supreme Court's decision in Community for Creative Non-Violence v. Reid established a multi-factor test for determining who is an "employee" for copyright purposes. The factors include control over how the work is done, whether the employer provides equipment and sets the schedule, payment method, tax treatment, and whether benefits are provided.
For a regular, salaried W-2 employee working at the company's direction, this is straightforward. The company owns the work.
Part 2: Independent Contractor Works
This is where it gets dangerous. For independent contractors, a work is only "made for hire" if two conditions are both met:
- The work falls within one of nine enumerated categories in the Copyright Act
- There is a written agreement between the parties specifying it's a work made for hire
The nine categories are: collective works, parts of motion pictures or audiovisual works, translations, supplementary works, compilations, instructional texts, tests, answer materials for tests, and atlases.
Computer software is conspicuously absent from this list.
Software is classified as a "literary work" under 17 U.S.C. Section 102(a)(1). "Literary work" is not one of the nine categories. This means that software developed by an independent contractor is almost never a statutory work made for hire, regardless of what the contract says.
What This Means in Practice
If your contract with a freelance developer only includes "work made for hire" language, you probably don't own the code they wrote for you. The contractor is the legal author and copyright owner.
Saying "this is a work made for hire" in a contract does not make it true if the statutory requirements aren't met. Copyright ownership doesn't work by agreement alone when the work-for-hire doctrine doesn't apply.
The Fix: Explicit IP Assignment
The solution is straightforward: every contractor agreement must include a clear, written assignment of all intellectual property rights.
A proper IP assignment clause transfers copyright, patent rights, trade secrets, and all other IP from the contractor to the company. It should be broadly drafted, cover all work product created under the agreement, and include a commitment to execute any additional documents needed to perfect the assignment.
This is not the same as a work-for-hire designation. An assignment is a transfer of ownership. A work-for-hire designation is a claim about who the original author is. When the statutory requirements for work-for-hire aren't met (which is almost always the case for software), the designation has no legal effect on its own.
The California Trap
In California, there's an additional wrinkle. Under California Labor Code Section 3351.5, an individual commissioned to perform work on a "work made for hire" basis can be deemed a "Statutory Employee." This triggers obligations for state disability insurance, unemployment insurance, and workers' compensation.
Failure to carry workers' compensation insurance for a statutory employee can be a misdemeanor. First offense: up to 1 year imprisonment, fine up to double the premium amount (minimum $10,000).
This means that using "work made for hire" language in a California contractor agreement can inadvertently create employment obligations, even when the person is a legitimate independent contractor in every other respect.
What Happens During Due Diligence
This issue surfaces predictably during investor due diligence or M&A. The buyer's or investor's counsel will review contractor agreements and ask: "Does the company own all IP in its product?"
If your contractor agreements rely on work-for-hire language alone, the answer is "probably not." Fixing this after the fact requires tracking down every contractor, negotiating retroactive assignments, and sometimes paying for rights the company thought it already had.
This process is expensive, time-consuming, and can delay or kill deals.
The Bottom Line
Do not rely on "work made for hire" language for software developed by independent contractors. It almost certainly doesn't qualify under the Copyright Act.
Every contractor agreement should include:
- A comprehensive IP assignment clause covering all work product
- A commitment to execute additional documents as needed
- Representations that the work is original and doesn't infringe third-party rights
If you're in California, be aware that work-for-hire language itself can create statutory employment obligations.
We draft contractor agreements that actually transfer IP ownership. If your current agreements rely on work-for-hire designations alone, they need a review.
